riptide wrote:Bonds have been dropping every day [recently...]Why ? I thought they were a stable fixed investment.

riptide:

You have made over 600 posts during the last two years. I am surprised that you do not know that bonds fluctuate? Care to explain?

Thank you and best wishes.Taylor

Good point. I once had an instructor who wrote on the chalkboard for my sake. RTWDT. My first question to him, he pointed to those letters. I ask him what they meant. "Read The Whole Dang Thing." I did, and there was the answer to my question hitting me in the brain.

Knowledge is knowing that the Tomato is a fruit. Wisdom is knowing better than to put the tomato in a fruit salad.

Riptide: Bonds have risk, particularly credit risk and interest-rate risk. The interest-rate risk has been showing up lately, as real rates rise and inflation expectations increase. It's dangerous to think of bonds as being "safe", though it is easy to be misled on this point, as the inaccurate "safe" descriptor is used on this forum frequently. What people probably mean when they say "safe" is that investment-grade bonds are less volatile than stocks. That does not mean you can't lose money. You can--a lot. In at least two time periods in the 20th century, bonds lost more than 50% of their value: a five-year period around WWI and a multi-decade period culminating in the inflationary crises of the 1970s. The losses happened more slowly than the typical loss in stocks, but if you look at historic returns and just think about what a regular, nominal bond is--promise to pay a fixed dollar amount over a period of time--it should be obvious that this is not a totally "safe" investment, even though most bonds are much less volatile than stocks.

"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

Investors believe that this huge project, along with the tax cuts on the wealthy...proposed, could send the deficit soaring and require Uncle Sam to borrow a lot of money.

"Meaning the government will have to sell more bonds," said Bryan Whalen, group managing director at investment management firm TCW.

All that borrowing could drive up the returns bond investors get in the future. So investors today are saying, 'pony up, bonds, We know better returns are coming down the road.' So again, they’ve driven yields up.

Keeping in mind "investors" don't know the future any better than anyone else and are just making predictions. But that's the "why" of bond markets fluctuating at the moment.

And as explained above, when yields on current bonds go up, prices on existing bonds go down (because the newer higher yield bond is worth more).

People should be very happy that with the 10 year yield having risen to 2.25%, the stock market is up slightly. It's early to make judgments, but its a very positive sign. And one that you could have made some money betting against.

saltycaper wrote:Riptide: Bonds have risk, particularly credit risk and interest-rate risk. The interest-rate risk has been showing up lately, as real rates rise and inflation expectations increase. It's dangerous to think of bonds as being "safe", though it is easy to be misled on this point, as the inaccurate "safe" descriptor is used on this forum frequently. What people probably mean when they say "safe" is that investment-grade bonds are less volatile than stocks. That does not mean you can't lose money. You can--a lot. In at least two time periods in the 20th century, bonds lost more than 50% of their value: a five-year period around WWI and a multi-decade period culminating in the inflationary crises of the 1970s. The losses happened more slowly than the typical loss in stocks, but if you look at historic returns and just think about what a regular, nominal bond is--promise to pay a fixed dollar amount over a period of time--it should be obvious that this is not a totally "safe" investment, even though most bonds are much less volatile than stocks.

riptide wrote:Bonds have been dropping every day [recently...]Why ? I thought they were a stable fixed investment.

riptide:

You have made over 600 posts during the last two years. I am surprised that you do not know that bonds fluctuate? Care to explain?

Thank you and best wishes.Taylor

You should read some of those posts, then you will understand.

Mr. Larimore,I should have titled the post, Why is the bond fund dropping so hard after the election?I know bonds fluctuate, but after the election mine had dropped more than they ever dropped. Thanks.

riptide wrote:I should have titled the post, Why is the bond fund dropping so hard after the election?I know bonds fluctuate, but after the election mine had dropped more than they ever dropped. Thanks.

In at least two time periods in the 20th century, bonds lost more than 50% of their value

.Bogleheads:

It is important to understand that there are many types of bonds. As Salty says, some bonds have lost more than 50%--even 100%. However, other type bonds are much less volatile as compared with stocks. For example, Vanguard's Total Bond Market Index Fund's worst annual loss since its inception in 1986 was -2.66% in 1994. It gained +16% in 1995.

Probably need to study some economics for a sound answer - there are many factors here. Inflation expectations, taxation cuts expected, expected boost to economic growth, Fed murmuring about continued interest rate increases in the near future, [OT comment removed by admin LadyGeek] .

Small cap value is doing rather well and general stocks are doing pretty well too- hopefully you are well diversified and will see the overall benefit. I prefer to look at my portfolio as a whole. If bonds drop a couple percentage points and stocks rise 5-10% do I really care what is happening with bonds? I want those bonds to rise or be fairly stable when stocks plummet. If stocks are having a good time then I don't wory about bonds at all. If stocks and bonds plummet then I shall cry(until I realise I'm in it for the long term!)

Looking at the Morningstar growth of $10k chart, Vanguard's Total Bond Market has taken a bit of a dive since about November 6. I don't think it will matter much in the long run. It will likely be nothing more than a blip.

But it is a bit curious and I too wonder what caused it. I don't recall hearing anything about interest rates going up (the first thing I would think of).

In at least two time periods in the 20th century, bonds lost more than 50% of their value

.Bogleheads:

It is important to understand that there are many types of bonds. As Salty says, some bonds have lost more than 50%--even 100%. However, other type bonds are much less volatile as compared with stocks. For example, Vanguard's Total Bond Market Index Fund's worst annual loss since its inception in 1986 was -2.66% in 1994. It gained +16% in 1995.

Best wishes.Taylor

Intrayear though there were larger losses. YTD total bond is up about 3%. But over the last week or so it is off 2%. I haven't looked in detail but I wouldn't be shocked to learn that a 2% drop happens pretty much every year (i.e. from some intra year peak to a valley). It is the 5%+ ones that are pretty rare (i.e. think about the same frequency as a 20% or stock loss).

And of course for real bond fun, look at something like EDV. People love it's diversify effect during times like 2008 but it is a treasury bond fund that can go up 50% or down 30% in a year time frame.

In at least two time periods in the 20th century, bonds lost more than 50% of their value

.Bogleheads:

It is important to understand that there are many types of bonds. As Salty says, some bonds have lost more than 50%--even 100%. However, other type bonds are much less volatile as compared with stocks. For example, Vanguard's Total Bond Market Index Fund's worst annual loss since its inception in 1986 was -2.66% in 1994. It gained +16% in 1995.

Best wishes.Taylor

I don't know if it was 20-yr or 30-yr T-bond that lost more than 50%--not sure what was issued 1915-1920 and 1941-1981--but those were long-term bonds. What would the 10-yr and 5-yr have done? I know someone somewhere already calculated the comparable return, but I don't know, and most of us don't invest in individual Treasurys anyway. So how about a bond fund?

It's easy to be comforted by Vanguard Total Bond Market Index Fund since it was not around during the 1970s, but Fidelity Investment Grade Bond Fund (FBNDX) was around. What happened to it during the 1970s? $10,000 invested in a 10-year period from 1971-1981 grew to about $15,500, nominal. What was $15,500 in 1981 worth in 1971 dollars? Only $6,900. Ouch! Looks like a 30% loss in real terms if I'm doing the math correctly. Certainly not what you would expect from a "safe" investment. It could happen to Vanguard Total Bond Market Index Fund too.

Is this to say that one should not invest in bonds or that they should change their bond allocation? No, and not necessarily. But we should admit the risks we face when we invest in bonds, even if those risks are different than stocks, and we should realize that most of us have spent the majority of our investment lifetimes in a time period where falling bond yields have muted interest-rate risk. I'm confident the next 35 years will not look like the last 35 years, and even though they might still be a good 35 years for bonds, I'm not sure investor expectations have caught up entirely to the present-day situation, which is odd, since it's been talked about constantly. Perhaps too much "crying wolf" at this point. In any event, I feel most comfortable with my allocation to TIPS, CDs, and short-term corporate bonds, and this for a large fixed-income allocation. I would not try to sway others to abandon allocations they feel comfortable with, but those few brave souls who focus on long-term Treasurys, you must have either very high stock allocations, or you just like the adrenaline rush.

"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

retiredjg wrote:But it is a bit curious and I too wonder what caused it. I don't recall hearing anything about interest rates going up (the first thing I would think of).

It's not just the first thing. It's the only thing.

It is hard/impossible to break down exactly what constituents of the nominal rate have gone up: the real rate, the expected inflation rate, the yield premium demanded for possible inflation beyond the expected inflation rate. I would guess all of them.

"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

Actually, if you "own bonds" (not bond funds) your return is assured (as long as the issuer doesnt default). If you hold the bonds until they mature you get your intereat payments plus the return of your principal at maturity.

Actually, if you "own bonds" (not bond funds) your return is assured (as long as the issuer doesnt default). If you hold the bonds until they mature you get your intereat payments plus the return of your principal at maturity.

True but you are not guaranteed a real return; for instance, if inflation rises above the yield of the bond, your purchasing power will decrease.

All things equal, your bonds will rise if interest rates go lower. I leave it to you to figure out whether they will. But for Germany and Japan, much of their yield curve is already negative. (Their short term debt is paying negative interest) Interest rates are so low due to central bank intervention.

If that 5000 year low interest rate rises, you will lose your principal on bonds. How much will you lose? Well for VBMFX/ BND/ VBTLX you will lose 5.8% of your bond investment for every percentage the interest rates of comparable securities rise. (As of 9/30/2016, vanguard states that the average duration is 5.8 years)

Moreover bonds are not stock. They don't bounce back the same way stocks do. They are not ownership in equity. That means in a sense, once a bond drops, the only mechanism the bonds have of returning back to their principal is for rates to drop again. (minus the interest paid by them)

It is often said that no one can predict the market. That is true. But for bonds it means something different than for stocks. For bonds, rates are greatly affected by monetary policy, which is a function of political will. To me saying no one can predict the bond market is a little closer to saying one can predict the political will of those in charge. The political will of the Fed is to raise rates. Whether they will do it or not is another story, but it's no secret that they have voiced an intention to for over a year. The Fed's raising of rates will affect the bond market further.

The fed does not directly control market interest rates for US debt, but the market market certainly gauges their prices around it. And they certainly can move the market with their policy--which is kind of the point isn't it?

In light of the above I personally decided that that I did not want to be in bonds. I did not want to lose principal in my safety asset. (I do use G fund however)

If you feel the same way, there are a number of alternatives people frequently discuss here. For one, there's the G fund, there's CDs, TIPs, I bonds, EE bonds.

Also consider that Larry Swedroe and Nisiprius have both advocated for bonds that are lower in duration. It is sometimes said on this website that one should have bonds of duration no longer than 3 years in their portfolio. VBMFX/ BND/ VBTLX is 5.8

It seems that the expectation of inflation in the future is eroding the value of long term bond funds the most. Short term bond funds would be a better choice because they are able to swap out lower bond yields for higher yields as they come due (to help offset inflation). Long term bonds offset some of the inflation risk during pricing - ie, longer duration bonds have higher yields to help offset inflation risk.

My own opinion is that there is already so much money in the economy these days that inflation will have to start appearing at some point. I had already started to rotate out of bonds, so somewhat surprised that it took this long to affect bonds.

retiredjg wrote:But it is a bit curious and I too wonder what caused it. I don't recall hearing anything about interest rates going up (the first thing I would think of).

By definition, if prices went down rates went up. They are simply two measures of the same thing.

On Nov 9 the 5-year Treasury rate increased from 1.34% to 1.49%, and on Nov 10 it went to 1.56%, so a total increase of 22 basis points (bps) in two days. On Nov 9 the 10-year Treasury rate increased from 1.88% to 2.07%, and on Nov 10 it went to 2.15%, so a total increase of 29 basis points (bps) in two days.

saltycaper wrote:It is hard/impossible to break down exactly what constituents of the nominal rate have gone up: the real rate, the expected inflation rate, the yield premium demanded for possible inflation beyond the expected inflation rate. I would guess all of them.

We can at least examine the impact of the change in inflation expectations by looking at the change in the breakeven inflation rates (nominal Treasury minus TIPS) over those two days. Over the same 2-day period, Nov 9-10, the 5-year and 10-year breakeven inflation rates increased by 13 and 15 basis points respectively. So it would appear that roughly half of the increase in the nominal rates was due to increasing inflation expectations, but of course there are other effects, like liquidity and unexpected inflation premiums, so it's hard to say this with great certainty.

Put me in the group of having given up on trying to understand what drives bonds up and down. There are so many (seemingly, anyway) different bonds that respond in differing ways to the same news I quit trying to understand them. I am content and just trust that I need them in my 3 fund portfolio in the form of the Total Bond Fund. I suppose this is a good buying opportunity just like any other fund or bond or stock that drops in value (I think!).

Actually, if you "own bonds" (not bond funds) your return is assured (as long as the issuer doesnt default). If you hold the bonds until they mature you get your intereat payments plus the return of your principal at maturity.

This is an important point. Individual bonds fluctuate in value, but if you buy them at issue and hold them to maturity that does not matter.

I inherited some individual bonds, and was able to sell one above the price at maturity recently. For another, the bid was below the value at maturity so I am holding onto it. Different interest rates, different maturity dates, different amounts, different issuers, different results.

riptide wrote:I have the Vanguard Total bond Index fund if that matters.

But you have access to the G fund, and there's countless threads about using that fund for bonds. Today the G fund closing price will be fractionally more than yesterday. I "G"uarentee it. Anyways, you haven't lost a penny if you don't sell your bond fund. Just hold it and relax.

One cannot enlighten the unconscious. | Endurance athletes are the Bogleheads of sports. | "I like people, I just don't want to be around them." - Russell Gordy

riptide wrote:I have the Vanguard Total bond Index fund if that matters.

But you have access to the G fund, and there's countless threads about using that fund for bonds. Today the G fund closing price will be fractionally more than yesterday. I "G"uarentee it. Anyways, you haven't lost a penny if you don't sell your bond fund. Just hold it and relax.

It's a shame that such a fund isn't available to the general public (outside of the TSP). From everything I've seen mentioned about the G fund, it's probably the best fund to have the fixed income portion of the portfolio in.

Actually, if you "own bonds" (not bond funds) your return is assured (as long as the issuer doesnt default). If you hold the bonds until they mature you get your intereat payments plus the return of your principal at maturity.

This is an important point. Individual bonds fluctuate in value, but if you buy them at issue and hold them to maturity that does not matter.

I inherited some individual bonds, and was able to sell one above the price at maturity recently. For another, the bid was below the value at maturity so I am holding onto it. Different interest rates, different maturity dates, different amounts, different issuers, different results.

The difference is illusory. It allows you to more easily ignore the fluctuations that are giving the OP pause, but the effect on your bottom line is the same. It also presents the inherent contradiction of "I want to manage my own bond portfolio in excruciating detail so I can ignore esential aspects of my bonds". It's not just about the price, it's also about the yield -- which fluctuates with price and it can easily make your bond not worth holding after it appreciates, because you will make less money holding it for the remainder of the term than by selling and putting the money in a good savings account. This is the case with many old Treasuries today, for example.

I'm saying it's an illusion because if you need the money you will take the loss; your ability to redeploy money to stocks or personal emergencies is that much reduced. If you hold to maturity and think of your value / coupon as unchanging and unaffected (imho the wrong view, as mentioned above), that coupon will be less than market yields by precisely the loss that you thought you avoided, over the term of the bond. Compare to someone holding cash, who can invest into the higher yields today and over time make significantly more money than you. The cash person indeed did not have interest rate risk -- you did, just like the person holding a fund.

Kevin M wrote:By definition, if prices went down rates went up. They are simply two measures of the same thing.

On Nov 9 the 5-year Treasury rate increased from 1.34% to 1.49%, and on Nov 10 it went to 1.56%, so a total increase of 22 basis points (bps) in two days. On Nov 9 the 10-year Treasury rate increased from 1.88% to 2.07%, and on Nov 10 it went to 2.15%, so a total increase of 29 basis points (bps) in two days.

And so there is an answer.

The good news is that these higher interest rates will cause the TBM to pay out more in dividends. I don't know what the lag time is, but I bet "Kevin the Bond Man" does.

Riptide, you are invested well and don't need to worry about these little fluctuations. But it is still good to wonder about these things and ask.

Actually, if you "own bonds" (not bond funds) your return is assured (as long as the issuer doesnt default). If you hold the bonds until they mature you get your intereat payments plus the return of your principal at maturity.

This is an important point. Individual bonds fluctuate in value, but if you buy them at issue and hold them to maturity that does not matter.

I inherited some individual bonds, and was able to sell one above the price at maturity recently. For another, the bid was below the value at maturity so I am holding onto it. Different interest rates, different maturity dates, different amounts, different issuers, different results.

The difference is illusory. It allows you to more easily ignore the fluctuations that are giving the OP pause, but the effect on your bottom line is the same. It also presents the inherent contradiction of "I want to manage my own bond portfolio in excruciating detail so I can ignore esential aspects of my bonds". It's not just about the price, it's also about the yield -- which fluctuates with price and it can easily make your bond not worth holding after it appreciates, because you will make less money holding it for the remainder of the term than by selling and putting the money in a good savings account. This is the case with many old Treasuries today, for example.

I'm saying it's an illusion because if you need the money you will take the loss; your ability to redeploy money to stocks or personal emergencies is that much reduced. If you hold to maturity and think of your value / coupon as unchanging and unaffected (imho the wrong view, as mentioned above), that coupon will be less than market yields by precisely the loss that you thought you avoided, over the term of the bond. Compare to someone holding cash, who can invest into the higher yields today and over time make significantly more money than you. The cash person indeed did not have interest rate risk -- you did, just like the person holding a fund.

I take your point. My implied point, which I should have been more explicit about, was that individual bonds can be more predictable than a bond fund if the investor is in a position to hold to maturity. This is not to say that individual bonds are necessarily a better option.

riptide wrote:I have the Vanguard Total bond Index fund if that matters.

But you have access to the G fund, and there's countless threads about using that fund for bonds. Today the G fund closing price will be fractionally more than yesterday. I "G"uarentee it. Anyways, you haven't lost a penny if you don't sell your bond fund. Just hold it and relax.

It's a shame that such a fund isn't available to the general public (outside of the TSP). From everything I've seen mentioned about the G fund, it's probably the best fund to have the fixed income portion of the portfolio in.

Someone on another thread a while ago pointed out if you can set up an account with MyRA you are invested in the G Fund. Though most people would not want their Roth in the G Fund.

As for why G Fund isn't available to everyone...it's important to think about the G Fund as a stable value fund. So why don't VG or Fidelity go offer their own stable value fund similarly built to the G Fund? Guessing it's not entirely profitable. My understanding with stable value funds is that an insurance company has to underwrite it. Federal government employees and military are a specific pool of people that are easier to predict than everyone. And more importantly, rather than a private insurance company taking on the risk, the government takes on the risk. Why does the government take on the risk? Because prior to the existence of the G Fund the government used to offer a pretty decent pension to its employees. In the 80's when this pension was cut back (benefits scaled back, employee contributions increased, and have been increased every few years or so since then) they needed some sort of incentive in their "401k" that wouldn't leave fed employees out to dry. So G Fund was a good "guarantee" for employees who would no longer have full pensions. If members of congress weren't also using the TSP (and might I mention they have a more generous pension than anyone else) I would guess they would gut the G Fund. But since they directly benefit from it, I suspect it will be around for a little while longer at least. Or maybe it will be a congress only benefit in the future.

retiredjg wrote:The good news is that these higher interest rates will cause the TBM to pay out more in dividends. I don't know what the lag time is, but I bet "Kevin the Bond Man" does.

Challenge accepted.

The easiest way to think about it is just using the duration-as-point-of-indifference rule of thumb, which is that you will earn about the same total return (as if rates had not changed) in a number of years equal to duration, assuming no more interest rate changes (which of course is unrealistic, but that's about all we can say). Duration of total bond fund is 5.8 years.

But the main contributor to this is that bonds will gradually recover from the price drop as they approach face value at maturity. The secondary effect, that maturing bonds can be reinvested at higher rates, is a smaller effect over 5-6 years. Of course over longer time periods, reinvesting in bonds at higher rates starts to have a significant positive impact, which is why long-term investors should view increasing bond yields and falling bond prices as a good thing.

The bigger and faster the price drops, the better, since that gets the pain out of the way, and allows us to start benefiting from higher rates sooner. Say the yield of a bond fund with duration of five years increases soon and quickly from 2% to 4%, with an associated price decline of about 10%, then does not change again for 10 years. At the end of about five years from now, we'd be in the same place we would have been without the rate increase, and then we'd earn 4% for the next five years, so say roughly 3% over 10 years.

If instead, the yield increases from 2% to 4% at the end of year five, we'd be in the same place 10 years from now as if rates had remained at 2% (so 2% over 10 years), and we won't start pulling ahead until 10 years from now.

I have not owned Total Bond Market as long as Taylor, but in the early 1990's, I bought shares at $9.39 each and at a couple of subsequent times at about $9.70 each. These are clearly well below the current price and show the sorts of share price fluctuations that can occur. Compared to stocks, however, these are not large fluctuations.

Geologist wrote:I have not owned Total Bond Market as long as Taylor, but in the early 1990's, I bought shares at $9.39 each and at a couple of subsequent times at about $9.70 each. These are clearly well below the current price and show the sorts of share price fluctuations that can occur. Compared to stocks, however, these are not large fluctuations.

Yes - even looking at municipal bond funds, VWIUX (Intermediate tax exempt) - it is $14.02 today. down 4% from this summer. 14 years ago (April 2003) it was around $14 too. bonds NAV/ticker price are stable compared to stocks. You get your income from the dividends...though less today.

.034 monthly dividend in 2016 versus .047 monthly dividend in 2003...monthly dividend income is nominally down 28% today compared to 13-14 years ago.

What cost $.047 in 2003 would cost $0.06 in 2015. So even worse than I thought...receiving .034 dividend monthly in 2015, but that is worth only 56% of what it was in 2003, so your income is almost 50% less due to inflation and lower yields.

dbr wrote:You are mistaken. Bond prices fluctuate for any variety of reasons.

After inflation, CDs, savings accounts, and money market funds also fluctuate in value, as does currency under the mattress.

A truly stable valued asset does not exist.

Sure it does. As Bogle taught you can have stable income (bond) or stable principle (MMF/savings account/G fund/Stable value fund) but not both.

Unless you're talking about stability on a real, after-inflation basis. In which case I agree with you.

Of course, after inflation. There are stable values in nominal dollars, such as currency itself, but it is misleading to neglect purchasing power except in the case one anticipates funding an expense that is fixed in nominal dollars, such as a loan or some kind of contract that is set in nominal dollars.

lws6772 wrote:Well, according to the "USA TODAY" - "Bond investors lost more than $1 trillion on global bonds as they braced for changes by President-elect Donald Trump, which could result in higher interest rates and more inflation".

riptide wrote:I have the Vanguard Total bond Index fund if that matters.

But you have access to the G fund, and there's countless threads about using that fund for bonds. Today the G fund closing price will be fractionally more than yesterday. I "G"uarentee it. Anyways, you haven't lost a penny if you don't sell your bond fund. Just hold it and relax.

It's a shame that such a fund isn't available to the general public (outside of the TSP). From everything I've seen mentioned about the G fund, it's probably the best fund to have the fixed income portion of the portfolio in.

Actually, the G fund is available to the general public if they want to invest in the MYRA, a Federally sponsored Roth IRA designed for beginning investors (and limited to a total of $15K).